misled investors by not properly disclosing the amount of troubled mortgage assets it held as the market began to implode in 2007

TO BE NOTED: From Alphaville:

"Citi, SEC, in talks to settle probe Posted by Gwen Robinson on May 28 05:18.

Citigroup is in the early stages of negotiating with the SEC to settle an investigation into whether it misled investors by not properly disclosing the amount of troubled mortgage assets it held as the market began to implode in 2007, reports the WSJ. The talks indicate the SEC could be moving toward resolving a number of civil probes that began in late 2007, when mortgage-related losses began mounting on the books of banks and Wall Street firms. Among issues being debated at the SEC is whether Citi, as a recipient of government-rescue funds, should pay a large penalty in the case.

This entry was posted by Gwen Robinson on Thursday, May 28th, 2009 at 5:18 and is filed under Capital markets. Tagged with citi, sec."

but to scoop up secondary market dreck assets to game the public private investment partnership

From Naked Capitalism:

"Has the Gaming of the Public-Private Partnership Begun?

It certainly looks as if Citigroup and Bank of America are using TARP funds, not to lend, which was one of the primary goals of the program, but to scoop up secondary market dreck assets to game the public private investment partnership.

And it fleeces the taxpayer a second way: the public has spent enough money on both banks so that in an economic sense, they ought to have been nationalized. Yet for reasons that are largely ideological and cosmetic (the banks' debt would need to be consolidated were they owned 100% by Uncle Sam), they remain private. So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money.

This sort of thing was predicted here and elsewhere. Welcome to yet more looting.

From the New York Post (hat tip reader Hendririx):

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation's largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post...

But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The secondary market represents a key cog in the mortgage market, and serves as a platform where mortgage originators can offload mortgages in bulk that have been converted into bonds.

Yields on such securities can be as high as 22 percent, one trader noted.

BofA said its purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market....

While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.

Moreover, the MBS market has been so volatile during the economic crisis that a number of investors who already bet a bottom had been reached have gotten whacked as things continued to slide.

Around this same time last year some of the same distressed mortgage paper that Citi and BofA are currently snapping up was trading around 50 cents on the dollar, only to plummet to their current levels.

One source said that the banks' purchases have helped to keep prices of these troubled securities higher than they would be otherwise.

Both banks have launched numerous measures to help stem mortgage foreclosures, and months ago outlined to the government their intention to invest in the secondary market to expand the flow of credit."

Me:

Don said...

I hate to tell everybody this, but we own a large part of Citi, for example. We expect them to make us lots of money. We are shareholders. We want them to make lots of money. If they don't try, they'll be sued, by us.

That's what happened in TARP. It was a hybrid plan. Citi and the government don't have the same interests. On the one hand, we've given Citi a social purpose goal for the money ( namely, lend at all costs ), while, on the other hand, as shareholders, we simply expect them to make us money, and forget about social goals. Which is it?

Don the libertarian Democrat

March 26, 2009 1:55 AM

A sale of Banamex, at prices mooted around $9-12bn, would have a significant impact on the currency.

TO BE NOTED: From Alphaville:

"Citi, Banamex and the peso Posted by Tracy Alloway on Mar 20 08:53.

Citi’s Banamex saga has taken a rather ludicrous turn:

MEXICO CITY, March 19 (Reuters) - Mexico said on Thursday that foreign governments can own stakes in its banks given the crisis in global financial markets, meaning Citigroup will not have to sell its Mexican subsidiary Banamex for now.

The finance ministry had been examining whether a U.S. government rescue plan to take a stake in Citigroup (C.N) would force a sale of Banamex, Mexico’s second-biggest bank and one of the crown jewels in Citi’s global banking empire.

“The law does not cover emergencies derived from the global crisis,” the ministry said in a statement, referring to legislation barring foreign governments from owning Mexican banks.

While the statement did not mention Banamex or Citi by name, it made clear that Mexico does not want to rile battered financial markets by forcing a Banamex sale.

If the legal logic behind this deal sounds rather strange, it’s because it is. There is something else going on here.

These two graphs, from Standard Chartered, should give you a hint of what that might be.

The Mexican peso has weakened substantially since August 2008, meanwhile inflation in the country has stuck at quite a high level, creating something of a headache for the country’s central bank in terms of policy decisions; it can’t lower interest rates to boost its economy without further weakening the peso and increasing inflation.

A sale of Banamex, at prices mooted around $9-12bn, would have a significant impact on the currency.

RBS currency strategist Flavia Cattan-Naslausky explained to us last month:
… in 2001 Citibank paid USD12.5bn for Banamex. Banamex makes about USD900m in annual profits which is about 9x-10x book value. So that’s where this US9bn consensus number is coming from. But there are really several issues. First is who has that kind of cash?! And whoever does, do they want to put it all in Mexico these days?! So it would be more probable that there would need to be some financing scheme involved that lowers the cash portion of the payment. This would have strong implications for FX flows (or lack of) I think that it is a very big deal this whole sale as it will set a precedence for other foreign banks that need to divest in mexico because of nationalization of banks. It can get very complicated. That is why I think there is still a good amount of risk for the currency.

So being a bit flexible on legal rules on foreign ownership will save the Mexican government the hassle of sterilising currency outflows related to the deal and help preserve its fragile currency. A budding trade dispute with the US might might also have played a role in Mexican leniency, in this case.

But, make no mistake, this flexibility is meant to be very temporary. The Mexican government plans to send a bill to Congress to ‘clarify’ exemptions on foreign ownership restrictions in times of crisis. As Bloomberg reports, under that proposal:
… banks, after three years of operating under the exemption to allow foreign government stakes, would have to sell 25 percent of their Mexican unit’s shares on the local market. That requirement would rise to 50 percent of shares after six years.

So unless something changes in Citi’s ownership structure, Banamex is set to go — albeit eventually — whenever this ‘global crisis’ is over.

Related links:
Citigroup (C): Mexico moves the goalposts - Inca Kola
A Mexican US-fallout wave - FT Alphaville

This entry was posted by Tracy Alloway on Friday, March 20th, 2009 at 8:53 and is filed under M&A, Capital markets. Tagged with banamex, citi, currencies, mexico, Peso."

Me:

Don the libertarian Democrat Mar 20 14:03

Unless I'm mistaken, it sounds as if this would also allow the US to seize Citi, and hence, Banamex, and hold it until it was sold, at least for three years.

But we're not sure why they're offering such a big premium (via Dealbreaker)

From Clusterstock:

"Someone Made An Offer For Citi (C)

Joe Weisenthal|Mar. 6, 2009, 11:25 AM|1

Tags: Wall Street, Citi, Financial Crisis

But we're not sure why they're offering such a big premium (via Dealbreaker)

C Mar 6 2009, 11:43 AM EST

1.02	Change	% Change
	-	0.00%

Me:

Don the libertarian Democrat (URL) said:

Mar. 06, 11:55 AM

Actually, here's Reuters today:

"TOKYO (Reuters) - Citigroup plans to sell its 26 percent stake in Japanese online broker Monex Group Inc as part of the struggling U.S. bank's efforts to raise cash, the Yomiuri newspaper reported on Friday.

Shares in Monex, Japan's second-largest online brokerage in terms of customer accounts, fell 8 percent on the report, cutting the value of Citigroup's stake to 14.1 billion yen ($144 million).

Citigroup, which has received $45 billion of U.S. taxpayer funded capital injections since October, appears to have already sounded out several financial institutions on the Monex stake, the Yomiuri reported.

Yoshito Shimoyama, a spokesman at Nikko Citi Holdings Inc, Citigroup's holding company in Japan, declined to comment.

Citigroup is also trying to sell Nikko Cordial, a bricks-and-mortar retail broker with 109 branches across Japan.

Japan's top three banks -- Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group Inc -- have shown an interest in buying Nikko Cordial, sources have told Reuters.

The three banks may also jump at the chance to buy a stake in Monex, but would likely make it a first step toward seeking majority control, said Azuma Ohno, a brokerage industry analyst at Credit Suisse Securities.

Mitsubishi UFJ owns a 51 percent stake in kabu.com Securities Co, the fifth-largest among Japan's six major online brokers.

"If it thinks Monex is cheap, it might be interested in buying to expand its current operations," Ohno said.

Neither Sumitomo Mitsui nor Mizuho have an online brokerage unit, and buying a stake in Monex would allow them to make a full-fledged entry into the market.

But the potential sale of the Monex stake comes as Japan's online brokers struggle to maintain profitability with the benchmark Nikkei average hovering near a 26-year low."

You have here the same problem as with Toxic Assets; namely, there's a huge discrepancy between bid and ask. Essentially, we've been providing bridge loans for the bailouts. The problem is that many of these assets might not make it, or be worth nothing going forward. It's a huge risk, which the government is not acknowledging when it talks about the current risks.

because the current partial nationalization is actually the worst situation of all

From Clusterstock:

"Roubini: Citi Is Already Nationalized, Just Need To Finish The Job (C)

Henry Blodget|Feb. 28, 2009, 9:10 AM|2

Tags: Wall Street, Nouriel Roubini, Citi, Bailout, Stock Market, Banks, Financial Services

C Feb 27 2009, 07:41 PM EST

1.50	Change	% Change
	-0.96	-39.02%

Nouriel Roubini points out the truth in Vikram Pandit's strange statement yesterday about how the latest bailout should put nationalization concerns to rest. Yes, the concerns have been put to rest, Nouriel says, because Citi has already been nationalized. The only question remaining is whether we go all the way.

Nouriel says we should, because the current partial nationalization is actually the worst situation of all. And because we're just delaying the inevitable.

Aaron Task, TechTicker: Friday's announcement the government will convert up to $25 billion of its Citigroup preferred stock into common equity represents Uncle Sam's third direct attempt to rescue the floundering bank.

The conversion would give the government up to 36% control of Citigroup stock and leave existing common shareholders with as little as 26% of the company's common stock. That explains why the stock tumbled 39% to $1.50 Friday despite CEO Vikram Pandit's strange declaration: "In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest."

Pandit's claim is "like saying you're half-pregnant," says Nouriel Roubini and economics professor at NYU's Stern School and chairman of RGE Monitor.

"The government has already taken over the financial system," Roubini says, noting U.S. policymakers have committed $9 trillion to rescue the financial system and already spent $2 trillion. "So let's stop the delusion about 'no nationalization.'"

Roubini, who has publicly advocated for temporary nationalization of insolvent banks, says fully nationalizing Citigroup and/or Bank of America would have a minimal effect on the Dow, which is a price-weighted average. More importantly, he believes full nationalizations (vs. the current partial, piecemeal effort) would be better for the market and the economy because it's the first step in the process of cleaning up "bad" banks so they can later be sold back to private investors, i.e. "re-privatized", as was the case last year with IndyMac.

Tune in Monday as we'll have more from Roubini on:

• Why nationalization is the right course and Bill Gross is wrong.
• Why Ben Bernanke's "reasonable prospect" for a recovery in 2010 is unreasonable.
• What the Tresaury's ongoing "stress tests" of big banks means, and doesn't mean."

Me:

Don the libertarian Democrat (URL) said:

Feb. 28, 3:14 PM

Hybrids are always a bad idea, because the government and banks have competing interests. The tug of war between them is messy, costly, and hellish to get out of. If TARP hasn't convinced people of that, say, by reading the GAO report, for example, we're in really bad shape.

an excellent article about the dangers and advantages of nationalization

From Clusterstock:

"Faster, Please: Four Lessons From Sweden's Bank Rescue

John Carney|Feb. 28, 2009, 1:55 PM|3

Tags: Wall Street, Citi, Bailout, Banks, Financial Services, Bank of America, Credit Crisis, Tim Geithner, Barack Obama

Matthew Richardson, who teaches applied economics at NYU's Stern business school, has written an excellent article about the dangers and advantages of nationalization. Most important, he says, are that we learn the four central lessons of the example of Sweden.

What are those? Here you go:

1. Decisive action in terms of evaluating the solvency of the financial institutions.
2. Some form of “nationalisation” of the insolvent firms.
3. Separation of these insolvent firms into good and bad ones with the idea of reprivatising them.
4. The management of the process was delegated to professionals, as opposed to government regulators.

But go read the whole thing."

Me:

Don the libertarian Democrat (URL) said:

Feb. 28, 3:02 PM

The whole point, from the beginning, was to have a modus operandi in place to handle the big banks. In other words, some people saw that:
1) The FDIC couldn't just swoop in and take the big banks over.
2) That meant that we needed a special FDIC entity or a separate entity to take care of the big banks.
3) We needed to begin to work out how to break them apart.
If the FDIC could have handled them, then there would have been no need of a Swedish Plan. By the way, I believe that the Swedish Plan was partly based on the RTC. The only reason the RTC wasn't mentioned is because, at least from my point of view, that's where I first heard the phrase "Too Big To Fail". We didn't need a little bank fix.

Of course, I was assuming that we didn't want to, once again, show by our actions that some banks are too big to fail. Silly me. Also, the idea that these businesses can unwind themselves is belied by the fact that nobody wants to buy anything from them for any real money, because nobody trusts them. Joe Isuzu would be a better bet to sell theses assets.

As for the people who will take losses here, it's in their interest to predict the end of our way of life. We're going to take a big gamble whatever we do. I'd prefer a road that doesn't keep us subservient to these bank's interests, but that's just me.

Update on the government's state of denial: Improving

From Clusterstock:

"US Finally Admits It May Have To Take Over Banks

Henry Blodget|Feb. 24, 2009, 7:22 AM|4

Tags: Wall Street, Bailout, Banks, Financial Services, Citi, Bank of America, Credit Crisis, AIG, Tim Geithner, Barack Obama, Alan Greenspan

Update on the government's state of denial: Improving!

NYT: “We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.

Officials said they were bracing for the possibility of new problems that might indeed require the government to take a more aggressive stance.

“Given our involvement at this particular stage, there is an element, a possibility over time, that we will end up with some ownership of these institutions,” the official said. “This is really about aggressive anticipatory action. It is an acceptance that the future is uncertain, but that we can plan on a certain basis for it.”

(The rest of the article, meanwhile, is too depressing to read. Among other things, it contemplates what the government will do once it actually takes over all these companies.)"

Me:

Don the libertarian Democrat (URL) said:

Feb. 24, 9:25 AM

“They are desperate to not nationalize the banks,” said Robert J. Barbera, chief economist at ITG. “They know what happened when they took Iraq and they would just as soon not take over the banks, because if you own it, you gotta fix it.”

I hate to tell Mr. Barbera this, but it's our country, and we do have to fix it. This is the second "Can Do" American Spirit post of the morning. Maybe I'll start collecting them, for a wreath.